Competition Impacts Costs at Netflix12 May, 2005 By: Holly J. Wagner
Despite an uneventful annual shareholder meeting, Netflix stock rose $1.37, nearly 12 percent on the heels of competitor Blockbuster Inc.'s tumultuous board of directors election.
The stock continued to edge upward in after-hours trading, to $13.05, from its May 10 close of $11.58.
Netflix reported revenue of $154.1 million for the quarter, up from $110.4 million for the same quarter in 2004, but average revenue per subscriber fell to $18.91 from last year's first-quarter $20.43, according to the company's most recent Securities and Exchange filing.
Price competition from Blockbuster Online dented Netflix in the first quarter, mainly in lost revenue because the $17.99 monthly price of the Netflix's most popular (three-out) subscription plan today is lower than the $19.95 price in last year's first quarter.
Netflix ended the quarter with 3 million subscribers, up from 1.9 million in the same quarter of 2004, compared to 750,000 for Blockbuster Online. That was a mixed blessing, as more subscribers and a price war with Blockbuster increased revenue cost.
The number of DVDs Netflix mailed increased 72 percent, owing partly to a 65 percent increase in its subscriber base and to a fractional increase in the average number of movies each subscriber consumed. Postage and packaging expenses also increased.
Competition put pressure on subscriber acquisition costs, as Netflix was forced to spend more on TV and radio advertising to counter Blockbuster's ads. Cost per subscriber grew from $35.12 to $37.89, and the filing states it may continue to increase.
Revenue-sharing expenses increased 105 percent, to $16.4 million, attributed to more subscribers and more discs rented, as well as to more titles stocked under rev-share agreements. Also, some titles underperformed, costing Netflix under “a provision for the estimated shortfall on certain titles subject to minimum revenue-sharing payments.”
Netflix churn was 5 percent, up slightly from 4.4 percent in the prior quarter and from 4.7 percent in the first quarter of 2004.